With a prepaid card, you spend money that's already placed in a prepaid card account. You—or perhaps your employer or the government—load money onto the card. You may then use that card to, for example, pay for goods or services, withdraw cash from ATMs, pay for healthcare costs, or use natural disaster aid you received.
In the past, prepaid cards had few consumer protections. But on April 1, 2019, the Consumer Financial Protection Bureau's Prepaid Accounts Rule went into effect. This Rule offers a series of protections for users of these types of cards.
Read on to learn more about how prepaid cards work and what kinds of consumer protections are available under the Prepaid Accounts Rule.
One alternative to using cash or a credit card is using a prepaid card. Money is loaded onto the card with direct deposit, checks, or cash. Then, you may take the money out from an ATM when you need it, or you may buy items or services using the card.
Prepaid cards often have high fees, like monthly fees, activation fees, fees to get cash, customer service fees, reloading fees, bill payment fees, ATM withdrawal fees, overdraft fees, and more. And, in the past, most cards didn’t protect you if you lost the card or if you needed to dispute an item or service you bought with it. (Credit cards, on the other hand, and to a lesser degree, debit cards, have provided protections in these areas for many years. Read about how to dispute a billing error on your debit or credit card statement.)
Prepaid cards look a lot like credit cards. They’re generally the same shape and size, and are typically associated with a bank or credit card name brand, like American Express, Visa, or MasterCard. But when you use a prepaid card, you're using money that's already deposited into the account. With a credit card, you borrow money each time you make a charge and you have to pay it off later. (To get more information about credit cards, see Choosing a Credit Card: What You Need to Know and How to Avoid Credit Card Debt.)
The Prepaid Accounts Rule, sometimes called the Prepaid Cards Rule, applies to different types of prepaid cards, such as prepaid debit cards, digital wallets, peer-to-peer transfer apps that hold balances (like Paypal or Venmo), some payroll cards, tax refund cards, and certain government benefit cards. However, other kinds of cards—like gift cards usable only at a particular store or group of stores, disaster-relief cards, parking reimbursement cards, and health-related cards—are not affected by the Rule.
The Rule requires specific upfront disclosures for prepaid cards, limits a consumer’s liability if a card is lost or stolen, and generally makes prepaid cards a safer product for consumers.
Under the Prepaid Accounts Rule, the financial institution issuing the card must give you specific disclosures before you get a prepaid card. For example, the institution must disclose:
Once you register the card in your name, the Rule also limits your liability when a card is lost or stolen. Your liability for unauthorized electronic fund transfers depends on when you report the loss or theft. (The following information applies in situations when the financial institution provides periodic statements for the prepaid account and the account isn’t subject to an exception for unverified accounts.) (12 C.F.R. § 1005.6.)
Within two business days. If you tell the financial institution within two business days that your “access device” (see below) has been lost or stolen, then your responsibility for unauthorized charges is limited to:
An “access device” is a card, code, or other means of access to a consumer's account, or any combination thereof, that may be used by a consumer to initiate electronic fund transfers.
More than two business days after learning of the loss or theft, and up to 60 days after statement transmittal. If you notify the financial institution more than two business days after learning of the loss or theft, but up to 60 days after transmittal of the statement showing the first unauthorized transfer made with an access device (or when you electronically access your account, depending on the circumstances), your liability can’t exceed the lesser of $500 or the sum of:
More than 60 days after statement transmittal. If you notify the institution about an unauthorized electronic fund transfer that appears on your periodic statement more than 60 days after the statement is transmitted (or when you electronically access your account), for transfers within the 60-day period, your liability is the lesser of $500, or the sum of:
For transfers after the 60-day period, you have unlimited liability until the financial institution is notified, provided the financial institution demonstrates that these transfers would not have occurred had you given notice within the 60-day period.
If the card or access device was not lost or stolen, your liability depends on when you report the unauthorized electronic fund transfer.
Within 60 days. If the access device was not stolen or lost, if you notify the institution within 60 days after transmittal of the periodic statement on which the unauthorized transfer first appears or when you electronically access your account, then you have no liability.
After 60 days. If you report the unauthorized transfer more than 60 days after transmittal of the periodic statement on which the unauthorized transfer first appears or when you electronically access your account, you have unlimited liability for unauthorized transfers that happen 60 days afterward and before notice to the financial institution.
The Rule also protects consumers from expensive overdraft penalty fees, provides a process that financial institutions have to follow for investigating and resolving errors, and requires the financial institution to give consumers free and easy access to account information.
If you have additional questions about prepaid cards and your rights, consider talking to a consumer protection lawyer.